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April 21 — A debtor's attorney can recover attorneys' fees that were mistakenly returned to the debtor by the Chapter 13 trustee following the case's dismissal without confirmation, the U.S. Bankruptcy Appellate Panel for the First Circuit held April 14.
Judge Henry J. Boroff reversed the decision of the bankruptcy court and remanded the case, concluding that the bankruptcy court abused its discretion in vacating the fee order in the case.
The BAP found that the U.S. Supreme Court's ruling in Harris v. Viegelahn, 135 S.Ct. 1829 (2015), didn't apply in this case and thus, the debtor's attorney Jeffrey P. White was entitled to recover the settled amount of his fee award.
In Harris, the Supreme Court concluded that the plan payments made by a Chapter 13 debtor from his or her post-petition wages and held by the Chapter 13 trustee at the time the case is converted to Chapter 7 must be returned to the debtor rather than distributed to creditors (27 BBLR 721, 5/21/15). According to the court, a debtor's post-petition wages, including undisbursed funds in the hands of the trustee don't become part of the Chapter 7 estate created by conversion.
Chapter 13 bankruptcy allows individuals receiving regular income to obtain debt relief while retaining their property, but to do so, the debtor must propose a plan that uses future income to repay a portion of his or her debts over a three to five year period. In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated and the proceeds are distributed to creditors.
The question, the BAP said, is whether Harris applies where a Chapter 13 case has been dismissed prior to confirmation.
A majority of courts have concluded that Harris doesn't apply in a Chapter 13 case that has been dismissed prior to confirmation, the BAP said. According to pt. X, ch. 329 (D. Michael Lynn et al. eds., 2016), however, courts are split on the issue, citing In re Brandon, 537 B.R. 231 (Bankr. D. Md. 2015), and In re Beauregard, 533 B.R. 826 (Bankr. D.N.M. 2015).
The bankruptcy court abused its discretion, the BAP said. Bankruptcy Code Section 1326(a)(2) provides that a debtor's attorney is entitled to payment of attorneys' fees prior to disbursement of the undistributed plan payments to the debtor if the fees are a Section 503(b) administrative expense claim, the BAP said. In this case, attorney White sought approval of his fees and expenses under Section 330 and the court awarded those fees.
Debtor Corey R. Wheaton filed a Chapter 13 petition and was represented by White. The debtor filed two amended Chapter 13 plans, but several parties objected to the plans and neither was ever confirmed.
Chapter 13 trustee Peter C. Fessenden moved to dismiss the bankruptcy case because the debtor failed to make payments under the unconfirmed plan. The debtor opposed the motion, arguing that he would make payments and cure any defaults, but he didn't file an amended plan.
The bankruptcy court declared it would dismiss the case in 14 days unless the debtor converted the case to a more appropriate chapter. The debtor failed to seek conversion and the court dismissed the case.
White filed his fee application seeking $5,709 in attorneys' fees, which the court granted. Subsequently, White filed another fee application seeking an additional $4,062 in attorneys' fees, which the bankruptcy court granted. The trustee, however, inadvertently overlooked the last fee award and mistakenly paid White $2,816 in outstanding fees and refunded $7,596 to the debtor. White and the trustee attempted to recover the disbursed funds from the debtor, but they were unable to do so.
The trustee then filed his final report and account showing that he had distributed $4,297 to White as attorneys' fees and $7,596 to the debtor. White objected to the report because it didn't include the second fee award approved by the court. Later, the parties entered into a settlement agreement reducing the amount of unpaid fees to White to $3,000 and directing the trustee to pay that amount. The trustee paid White $3,000 in accordance with the settlement.
The bankruptcy court entered an order vacating the fee order, but didn't order White to turn over the $3,000 he received from the trustee under the fee order.
White appealed to the BAP arguing that the bankruptcy court erred in vacating the fee order in light of the ruling in Harris because Harris doesn't apply. The trustee agreed with White's position.
Judges Diane Finkle and Edward A. Godoy joined the opinion.
Jeffrey P. White, Esq., represented himself as appellant; Peter C. Fessenden, Chapter 13 trustee represented himself as appellee.
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